11.05.12 Friday Morning

Markets roiled by political chaos

This week the markets have been roiled by political chaos in Greece as the elections resulted in a fragmented split in votes causing a potential vacuum and giving extremist groups a window of opportunity to get a grip on power.

The extremist parties strongly oppose the austerity programme which is the fundamental reason investors exited risky assets early in the week in fear that any further conflict between the Greeks and the Germans is likely to lead to the embattled nation leaving the Euro.

The direct ramifications of a Greek exit may have been cushioned due to the large write downs already, although the contagion could quickly put the likes of Spain, Portugal and Italy under severe pressure and continue to test the Euro.

Amid the political turmoil Germany delivered better than forecast results for factory orders and industrial production on Monday and Tuesday but the fluctuating nature of these monthly figures along with the overhanging sovereign chaos marred the data.

It was reported that downgrades were looming for over 100 banks by credit rating agency Moody's on Wednesday which added to the risk-off environment. Downgrades will likely cause borrowing costs to rise for the banks and could force them to move closer towards a loan-deposit ratio of 1 to increase liquidity, triggering a deleveraging process that could drag on the Eurozone economy and result in a deepening recession .

There was a much needed bounce Wednesday afternoon ensuing news that the Spanish government are going to be part nationalising the country's fourth largest lender Bankia which was a sign that its banking sector is finally recognising the severity of the housing situation.

Weakening Chinese data early Thursday and Friday morning reiterated the slowdown in China and highlighted that domestic demand is waning which was underscored by a decline in inflation for April.

An interesting play on the Chinese economy would be to assess its impact on the Australian Dollar.

The Aussie Dollar has recently declined in tandem with worsening industrial and consumer activity in the world’s second largest economy, as China is Australia's largest export market. Similarly to Europe there is a definite trend of slowing growth across Asia which was exacerbated by GDP reports by the Philippines and Malaysia this week.

Although bulls may be inclined to focus more on the latest US trade data which was largely at odds with the slowing growth picture and manifested that exports have risen to a record level in the States.

JP Morgan caused a stir overnight Thursday during the Asian session and into the European session Friday as it reported a huge unexpected $2bn loss that pervaded panic to the wider market.

The shock to the markets was probably mainly attributed to the assessment of whether this is a 'tip of the iceberg' scenario and that systemic risk may be lurking under the surface.

In the weeks ahead the spotlight will certainly be on Greece's desire, or lack thereof, to stay in the Euro and on Spain's troubled banking sector.

Many experts believe Spain's woes are beyond the clout of the debt firewall of 1 trillion euros if they were to need a bailout so no doubt the size of the rescue fund will hit the headlines once again soon.

Any stocks that have reported good results this week, such as Intercontinental Hotels and Sainsbury's, have been overshadowed by the political and macro situation in Europe holding back gains in the share prices.

Intercontinental Hotels posted a 5% rise in profits driven by strong growth in China and are confident the London Olympic Games will boost revenue to deliver further impressive figures later in the year.

Sainsbury's reported a 7% incline in profits achieved via the supermarket’s marketing initiatives improving its price perception to customers.

Infrastructure services firm Balfour Beatty said its order book has maintained a level in excess of £15bn so far this year and Cairn Energy have completed its acquisition of Agora Oil & Gas which gives them expansive access to licences in the North Sea.

Economic data scheduled for next week include a 10 year Italian Bond Auction on Monday morning, German GDP and ZEW Economic Sentiment.

Tuesday morning followed by US Retail Sales in the afternoon.

On Wednesday there is the UK Claimant Count and Unemployment Rate and minutes from the latest FOMC meeting in the evening.

There are French and German bank holidays Thursday and a manufacturing index from the Philadelphia area in the States and on Friday is the start of the G8 meetings.